Thursday, November 09, 2017
6:00:56 PM EDT

Tax Talk Tanks Stocks, Again

by
Thomas Hughes

The Senate version of Trump's Tax plan would delay corporate tax cuts until 2019. The news was not well received by a market eagerly awaiting tax reform and sent the indices down by -1% in intraday trading. While a delay to tax cuts is not ideal the cuts are still in the plan and would lead to significant gains in earnings down the road, a realization that may have led traders to buy today's dip. Today's move took the broad market down to its 30 day EMA where buyers stepped in to support prices.

Asian indices were mixed in today's trading as earnings season winds up and Chinese inflation data came in ahead of expectations. Chinese consumer level inflation increased 1.9%, a tenth hotter than expected, while producer level inflation increased by 6.9% and three tenths hotter than expected. The Shang Hai Composite gained nearly 0.4% on the news while the Heng Seng nearly doubled that. The Japanese Nikkei had been up in early trading but fell in the later portion of the session to close with a small loss. Markets in Europe were not so buoyant, falling hard on mixed earnings and today's fall in US equities.

Market Statistics

Futures trading was weak right from the start. Aside from earnings the market was focused on today's expected release of the Senate version of tax reform. The SPX was indicated to open with a loss near -0.35% in the earliest hours and weakened to near -0.5% by the opening bell. The open was as expected, the SPX began the day with a loss near -10 points and then quickly extended to that to about -18 points in the first 20 minutes of trading. There was a small bounce before 10AM that left the index trending sideways near the early low but by 11:30 it was moving lower again. The day's low was hit just after 12:30 with the SPX down nearly 30 points. A rally began from that point that left the index trending upward the remainder of the afernoon.

Economic Calendar

The Economy

Weekly jobless claims rose by 10,000 this week as back logs of Puerto Rican and Virgin Island claims begin to be processed. This brings the total to 239,000 and still well within expectations. The four week moving average of claims fell by 1,250 to hit 231,3350 and a new low dating back to March of 1973. On a not adjusted basis claims rose 12% versus an expectation of 7.5% but remain down on a YOY basis. YOY they are down -6.5% and trending in line with long term labor market trends.

Continuing claims rose by 17,000 from last week's unrevised numbers to hit 1.901 million. The four week moving average fell -750 to hit 231,250 and a new low dating back to January of 1974. The total number of Americans receiving unemployment benefits rose 1,492 to hit 1.639 million. This gain is in line with expectations and seasonal trends in the work force. YOY total claims are down -8.1% and consistent with long term labor market improvement.

The Dollar Index

The Dollar Index fell in today's action as tax reform angst and data out of the EU weigh on the market. The good news for dollar bulls is that tax reform issues and today's EU data are not likely to affect central bank outlook, leaving the FOMC in divergence with the ECB, BOE and BOJ. Today's data included the German Trade Balance, better than expected with mixed indications within the report, and the latest EU Economic Forecast. The forecast upped current outlook for real GDP to 2.2% but forward outlook remains weak with growth slowing over the next two years. The Dollar Index is now moving lower within a near trading/consolidation range and looks like it will retest support at the $94.15 level. This level is the neckline of head&shoulders reversal and will be important to watch over the next few days. Longer term I remain bullish on the dollar.

The Gold Index

Gold prices moved higher to hit a 3 week high on today's dollar weakness. The caveat is that, like the dollar, spot gold prices are trapped within a near term trading range and winding up on tax news, economic data and shifting central bank outlook. The is range could persist into the near term until something emerges to provide a clearer direction for the dollar and/or US economy. Should the price of gold continue higher it is likely to meet resistance at or near $1,300.

The Gold Miners ETF GDX fell on today's rise in gold. This move is contrary to expectations and raises concern over the sustainability of current spot price, it may confirm a general expectation for lower gold prices in the short to long term. Regardless, the ETF is still within near, short and long term trading ranges and winding up ahead of its next big move. Today's resistance is just below the pair of moving averages with support target just below today's close near the mid point of the longer term trading range. A break beyond either will be significant and may lead to tests of upper resistance target near $24 and lower support target near $21.

The Oil Index

Oil prices closed with a gain near 0.35% after a day of volatile trading. Prices moved both higher and lower than yesterday's close, setting a new long term intraday high, but closed near the open creating a medium sized doji candle to the side of yesterday's candle. The move was driven by signs of market tightening, hopes OPEC will extend its production cap and more importantly, on turmoil within Saudi Arabia. Today's move helps confirm resistance near $57.50, a level that may prove important over the next few weeks.

The Oil Index opened with a loss but worked its way up throughout the day to close with a small gain and create a bullish looking green candle. This candle confirms support near the midpoint of Monday's long green marubozu candle. This action is a positive for the rally as it represents backing and filling of orders and positions not created during the Monday push higher. It also confirms support at the 1,275 level, consistent with the mid point of last years congestion band and market peak. I remain bullish on the sector and looking for this index to reach my 1,300 target.

In The News, Story Stocks and Earnings

Earnings were also on the minds of traders today. Early morning action was impacted by results from Perrigo, Time Magazine and Macy's. Macy's beat on the bottom line as cost savings activities bear fruit but revenue continues to decline and missed expectations. Despite the poor showing investors cheered the news as signs of turnaround are present in the data. Shares jumped in premarket trading, gapped at the open and closed with a gain of 10%.

Perrigo, maker of private label pharma products, reported a decline in revenue that came in much better than expected with earnings up 13% in the same time. The gains were driven on improvements in margins that are expected to drive future earnings gains. Guidance for full year 2017 earnings was raised to a range above consensus which led to a 13% gain premarket trading.

Time Magazine reported a 10% decline in YOY revenues as sales of print ads continue to be impacted by online. Revenue also missed expectations but the miss was offset by better than expected EPS. EPS beat by 16% and led management to maintain current outlook on strength in digital and brand extension revenues. Shares of the stock gained 10% in a day of volatile trading and may have put in a bottom.

After hours earnings include Disney, Hertz and NVIDIA. Disney reported a miss on the top and bottom lines on weakness in studio and broadcast revenues. ESPN, the usual drag on earnings, was able to hold steady. Shares fell -3% on the news.

Hertz beat on the top and bottom lines as global sales came in above expectations. Total revenues were down but much better than expected on strength in US pricing which offset weakness in storm affected areas. Shares of the stock jumped more than 10% on the news.

NVIDIA beat EPS and revenue estimates soundly. The company reports revenue is up 32% from last year with EPS nearly 25% better than projected. Gains are driven on gaming and datacenter growth and expected to continue into the future. Results were strong enough to lead to an upward revision in guidance which led in turn to a 10% jump for the stock in after hours trading.

The Indices

The indices moved lower in today's session, driven more by fear of tax reform than anything else. The positive within today's action is that in all cases support is evident, even in the Transports which led today's decline. The Dow Jones Transportation average closed with a loss near -1.10% after moving lower to create a medium sized red candle. Today's move was halted at the dual support of my long term up trend line and an all time high dating back to last year's post-election rally. The indicators remain bearish so I would expect to see support tested further but the longer term indications remain bullish, I think this is a buyable dip for the sector.

The next largest decline was set by the NASDAQ Composite. The tech heavy index closed with a loss near -0.60% after moving down to test support at the 6,700 level. Today's action formed a small doji candle within a near term trading range in evidence of that support. The indicators have weakened but remain consistent with an index in up trend so deeper decline is not expected at this time. A break below 6,700 would be bearish but near term only due to the closeness of moving average support.

The Dow Jones Industrial average comes in a close third with a decline of -0.43%. The blue chips created a small hammer doji testing support within the near term consolidation range. Support is at 23,300 and likely to be tested again. The indicators continue to weaken and have diverged from the recently set all time high which may indicate correction is at hand. A drop below 23,300 would be bearish but likely to meet support at the 30 day moving average. A drop below there could lead the market down to 22,500 and a long term up trend line.

The broad market S&P 500 closed with a loss of -0.37% and created a medium sized doji candle. The index moved down to test support at the bottom of a near term congestion range and just above the 30 day moving average. Today's action confirms the uptrend but comes with a caveat, the indicators continue to weaken and diverge from recently set highs. This may lead to further testing of support with a possible move to new lows. A break below the 30 day moving average would be bearish but likely to find support quickly provided no unbearably bearish news develops. A bounce from support would be trend following.

Today's moves were alarming at first but as the day wore on suggest that the market is still ready to buy on the dips. Now that the tax news is out and the market has reacted it can get back to the business of earnings. Earnings are coming in better than expected but are not fantastic, in a general broad market kind of way. That, along with the fact earnings season is drawing to a close, could lead the market into another period of rotation and consolidation as it has in the past. The long term outlook remains positive and in many cases improving which is something I expect will drive the market higher. I am cautious for the near term, tightening stops in preparation for potential declines, but remain firmly bullish for the short and long term.